If you get into investing for any amount of time, you’ll quickly hear the terms growth and value stock. Since the first day of trading on Wall Street, traders argued about Growth vs Value stocks.
The topics undergo constant debate, and the terms refer to distinctly different approaches to get high returns.
In essence, value investors look for stocks they can purchase at a discount.
Growth investors buy stocks that are rising rapidly in price because they’re exhibiting strong growth.
Are Value Stocks Riskier Than Growth Stocks?
In some ways, value stocks carry tons of inherent risk. The share price is selling at a “discount” because of something significant. It could be an accounting scandal or a big lawsuit that suddenly shaves 90% off the market cap.
Value-oriented investors perform their research, and they decide, hey, this stock should still be selling at $128 per share because of tangible assets and brand value. Since it’s now $1.41, it’s a bargain, and the potential upside is worth the substantial risk.
Which Performs Better?
According to a report from 2011, over the 87-year history or tracking, large-cap value stocks produced higher returns than large growth stocks.
During the same period of 1927 to 2011, small-cap value stocks produced higher returns than small growth stocks.
That’s the extent of the knowledge on value vs growth stocks performance. Even a study like this one could cause debates because of variables in investments. However, both large and small stock value stock held the edge against their growth-oriented counterparts. So that seems to end the argument about Growth vs Value stocks. Not everyone agrees on the conclusions about value vs growth stocks performance.
How Do You Know If a Stock Is a Value or Growth?
The short answer is you use tools to discover the type of stock you’re interested in purchasing. Most brokerage firms and listing services will contain stocks in categories. Major periodicals also will highlight which ones are which so you can find an investment you like.
You can decide for yourself based on growth rates and PE. If the stock has high earnings and a low share price, it’s probably a value investment. If the price per share is high and the profits are trending sky-high as well, it’s a growth play.
What Defines a Growth Stock?
At its most basic level, a growth stock exhibits the characteristic of growing earnings and revenues faster than peers in the industry and the overall market.
Growth stocks usually have high PE and increasing sales. That means customers are buying fast, and the share price is receiving the benefits. Apple, in 2003, is the example. A company that releases a blockbuster product has the potential to be a growth stock.
The growth vs value historical chart favors, value, but it all depends on who is interpreting the data. There are no apples to apple comparisons, and many of the reports have an internal bias. Ultimately, it’s up to each investor to chart their course. If one of the strategies holds greater appeal, it will be more natural to trade that way.
When Does Value Outperform Growth?
Value stocks are cheap compared to the rest of the market. That means they have a lot less room to decline if the market correct. They’re already well off their all-time highs and sucking wind. They should outperform growth stocks, then, during financial corrections for the market.
Growth stocks are the ones that everyone is tracking. Investors have high expectations, and their share prices are way up there. When corrections hit, and these stocks dip, it can cause a crisis of confidence for the investors. If they bail, the drop comes fast. That’s the answer to the question when does value outperform growth.
Value vs Growth Funds
Comparing growth vs value sectors requires paying attention to a precise set of dates. The backdrop of the economic outlook plays a vital role when determining the difference in gains between both areas. Value vs growth funds both take investors based on specific investing criteria. There are many opportunities in both the growth vs value sectors. Just see the – growth vs value historical chart for more.
Growth vs. Value Investing Which Is Better?
There will never be peace between growth and value investors. Each will continue to argue that their discipline is best. Growth investors are looking for that one big score, so they won’t need a ton of trades in their careers if they get it right. The same holds to a degree for value investors. However, they may hedge their bets against smaller investments merely because they’re wading into toxic areas looking for bargains.
Are you the type of investor who searches for bargains during the rest of your day? If so, then value investing will appeal. If you’re seeking a big score and want to own a part of the next big thing, a growth-oriented investment approach seems suitable.
Some investors will use either objective, depending on their strategy. A contracting market presents different opportunities than an expanding one.
Either Way, You Have to Research
It’s essential to perform research before buying any stocks. Most shares have people touting them because of financial interest. That’s why value investing in the Benjamin Graham fashion still appeals to many. Graham, who was Warren Buffet’s mentor, showed the younger man how to find bargains using precise mathematical formulations. Here’s a few more thoughts about growth vs value investing.
The strategy works well enough that Buffet never changes it seven decades of investing. Value investing is the way to find companies in a turnaround phase while they’re very undervalued. If you have the stomach to buy beaten-up stocks and the patience to wait for a comeback, value investing is for you. See how the – growth vs value historical chart looks before jumping in at the deep end.
If you would instead jump on the next fast-moving train out of town, then growth is your game. Growth stocks are usually attached to companies that you know and that are springing up everywhere. Many of the most famous companies in the world were growth stocks. The investors that bought in before the most significant phase of their development earned enormous sums.
There’s always a chance of hitting an excellent return using either a growth or value style. Investing is never predictable, but there are proven strategies for both disciplines that you can follow. Only then can you decide for yourself which one is better and more profitable. Growth vs value investing is an argument that will never end.